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January 06, 2014

Applying for Tax Exemption: Expedited Processing Still Available!

With the publication of Revenue Procedure 2014-4 on January 2, 2014, the IRS announced that determination letter requests (which includes requests included with Forms 1023 or 1024) are not eligible for expedited handling. UPDATE (2/19/14): It turns out that Rev. Proc. 2014-4 was not accurate on this point. The IRS has formally corrected this error in Rev. Proc. 2014-19 to be published in IRB 2014-10 on March 3, 2014.

For a startup charitable organization seeking a quick determination of 501(c)(3) status to address urgent needs (e.g., disaster relief) or meet a contingency required for prospective funding critical to its continued operation, this is particularly bad news. Current processing times for applications for 501(c)(3) status have generally been very slow with a backlog of over 65,000 applications at one point. One IRS agent has stated applicants should be prepared to wait at least one year for determination letters, though the processing times seem to vary widely across applications, often without much rhyme or reason. Fiscal sponsorship from a reputable fiscal sponsor may be a worthwhile consideration for startups to raise funds and conduct programs while waiting for an IRS determination.

California charitable organization startups may also want to consider filing for state tax-exemption using the long Form 3500 rather than the short Form 3500A, which requires a favorable IRS determination letter to accompany the filing. Until the organization receives a determination/affirmation of tax-exempt status from the Franchise Tax Board (FTB), it will generally be regarded as a taxable entity. If the due date for a tax return for an entity passes (generally, March 15 for a taxable organization using a calendar accounting year), the organization may be liable for taxes and penalties for missing such deadline. While this may not be a substantial concern if the organization receives recognition of exemption from the FTB retroactive to its date of incorporation (generally the case if the IRS application was mailed within 27 months of incorporation and the Form 3500A is filed after receiving the IRS determination letter), the FTB will issue severe notices of past due filings and may cause the organization to be suspended from conducting activities. This has become a complex scenario that deserves discussion with an attorney or CPA aware of the issues.